Troubled insurance company needs more help
For the third time, insurance company American International Group has turned to the government for help. The feds threw the company an $85 billion lifeline more than a year ago. After TARP fund started being handed out, the financing for the company was modified, and the total was brought to about $150 billion.
However, it appears that wasn’t enough. Now the company will receive an additional $30 billion from the TARP funds.
Why the bailout?
AIG signed a new bailout deal with the government as it faced its biggest quarterly loss in history. AIG is expected to report a $60 billion loss for last quarter on Monday. Without this bailout the company could face a downgrade in its credit rating, which would further damage the faltering company.
AIG guarantees about $300 billion of asset-backed securities and other debt. Analysts agree that allowing the collapse of the company would have consequences for the global financial system.
“The counterparties on most of the book are (European) banks that would be hammered if the U.S. walked away. Hopefully, the third bailout will be the charm,” said Robert Haines, senior insurance analyst at CreditSights.
The new deal
The most recent bailout package modifies the terms on the total funding that the company has received from the government. The new terms are more lenient in regard to a government investment in its preferred shares. It also includes a lower interest rate on a government credit line.
The interest rate on AIG’s government credit line will be decreased to match the three-month London Interbank Offered Rate, which is about 1.26 percent. This is expected to save AIG about $1 billion a year.
More details
The new funding would allow AIG to issue preferred stock to the government later. The government will probably get a 5 percent cumulative dividend on its preferred stocks.
In order to further reduce its debt, AIG is considering securitizing up to $10 billion in U.S. life insurance policies and give them to the government. This could offset much of the $38 billion it has used from its government credit line.
More government ownership
AIG isn’t the only company that has received government aid three times. The United States’ third-largest bank, Citigroup, has also sought help from the feds for a third time.
The Treasury Department upped its stake in Citigroup on Friday. Previously the U.S. government has about 8 percent ownership in Citigroup. In effort to stabilize credit market, the Treasury increased its ownership in Citigroup to 36 percent.
Citigroup deal
Citigroup is modifying it previous deal with the governemnt:
Already, the government holds $45 billion of preferred shares in Citigroup and has agreed to share losses on $301 billion of troubled bank assets, according to USA Today.
Under the new deal, the government will trade some of its preferred shares in Citigroup for common shares. This matches the actions of private investors, including The Government of Singapore Investment Corp., Saudi Arabian Prince Alwaleed Bin Talal, Capital Research Global Investors and Capital World Investors.
This conversion does not require any more taxpayer dollars.
I hope we don’t have to make too many more of these bailouts, otherwise we’re going to be saddling our grandchildren’s grandchildren with our debt. We keep giving more and more bailouts, and we aren’t seeing a whole lot of payoff for it so far, and we’d better, otherwise there ought to be some kind of law passed that these companies had better pay it all back.